Reducing Australia s Greenhouse Gas Emissions Targets and Progress Review

Reducing Australia s Greenhouse Gas Emissions Targets and Progress Review final Report February 2014

Published by the Climate Change Authority www.climatechangeauthority.gov.au ISBN: 978-0-9873828-6-3 This work is licensed under the Creative Commons Attribution 3.0 Australia Licence. To view a copy of this license, visit http://creativecommons.org/licenses/by/3.0/au The Climate Change Authority asserts the right to be recognised as author of the original material in the following manner: or Commonwealth of Australia (Climate Change Authority) 2014. IMPORTANT NOTICE PLEASE READ This document is produced for general information only and does not represent a statement of the policy of the Commonwealth of Australia. The Commonwealth of Australia and all persons acting for the Commonwealth preparing this report accept no liability for the accuracy of or inferences from the material contained in this publication, or for any action as a result of any person s or group s interpretations, deductions, conclusions or actions in relying on this material. Cover image courtesy of NASA

acknowledgements The Authority would like to thank the many people and organisations that contributed time and expertise to the Targets and Progress Review. These contributions have included climate science advice, assistance with economic modelling and analysis, and international and domestic policy expertise. These contributions have enhanced the quality of the Review and provided evidence to inform the Authority s recommendations. A number of government departments and public agencies have supported the work of the Authority during the course of the Review. They include: the Department of the Environment, the Treasury, the Australian Energy Markets Commission, the Australian Energy Market Operator, the Australian Embassy in China, the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Bureau of Resources and Energy Economics. The Authority consulted extensively across a range of industry, academic and non-government stakeholders. The Authority is particularly grateful to the support and assistance provided by: Dr Josep Canadell (CSIRO), Associate Professor Peter Christoff (University of Melbourne), Dr Ian Enting (University of Melbourne), Dr Roger Gifford (CSIRO), Dr Helen Hughes (CSIRO), Professor Lesley Hughes (Macquarie University), Dr Malte Meinshausen (University of Melbourne), Professor Michael Raupach (CSIRO), Dr Luke Reedman (CSIRO), Professor Will Steffen (Australian National University), Dr Penny Whetton (CSIRO), Alex Wonhas (CSIRO), the staff at ClimateWorks Australia, the Global Carbon Capture and Storage Institute, the US Department of State and World Resources Institute. Finally, the Authority would like to thank the many stakeholders who provided submissions throughout the Review.

targets and progress review final REPORT february 2014 5 Contents Summary 7 Recommendations 15 Part A Introduction and context 17 1 About this Review 19 2 Science and impacts of climate change 27 3 A global emissions budget for 2 degrees or less 43 4 Global action and Australia s role 53 Part B Australia s policies and progress to date 75 5 Australia s policies on climate change 77 6 Australia s progress to date in reducing emissions 85 Part C Australia s emissions reduction goals 99 7 Form and scope of goals 101 8 Australia s emissions budget to 2050 113 9 Australia s 2020 and 2030 goals 119 10 Economic implications of Australia s emissions reduction goals 127 Part D Reducing Australia s emissions Opportunities and challenges 147 11 Australia s emissions outlook 149 12 Using international emissions reductions to help meet Australia s goals 177 Part E Implementation issues under the carbon pricing mechanism 187 13 Caps for the carbon pricing mechanism 189 Appendices 201 A Public consultation 203 B Global action to reduce greenhouse gas emissions 207 C Sharing the global emissions budget 225 D Progress towards Australia s emissions reduction goals 233 E Calculating caps Assumptions, methods and tests 321 F How economic modelling is used in this Review 329 List of recommendations and conclusions 339 List of boxes, figures and tables 343 Glossary 349 Abbreviations and acronyms 353 References 355 Index 379

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targets and progress review final REPORT february 2014 7 SUmmary This is the final report of the Climate Change Authority on its Targets and Progress Review. The Climate Change Authority is required by legislation to review Australia s greenhouse gas emissions reduction goals and report on progress towards them. The Targets and Progress Review fulfils these requirements and recommends emissions reduction goals that would provide a clear course for action to 2020, and guidance beyond. The Authority was established as an independent statutory agency to provide advice to government and parliament. In developing this report, the Authority has assessed an extensive evidence base, along with significant input from stakeholders. Why is this Review important? Climate change science indicates the world is warming and human activities are the dominant cause. Global action to limit warming to below 2 degrees will benefit Australia. Climate change science is clear the world is warming and human activities are the dominant cause. Climate change poses major risks for Australia s people, economy and environment. A warmer climate is predicted to increase the frequency and intensity of weather extremes, such as heatwaves, droughts, floods and bushfires, and to cause rises in sea levels. Australia is likely to better adapt to projected impacts if global warming is limited to less than 2 degrees above pre-industrial levels. With larger increases, adaptation can be expected to become increasingly costly and challenging. The international community has made a commitment to keeping global warming below 2 degrees. To meet this shared goal, Australia and other countries need to strengthen their emissions reduction efforts. Australia stands to benefit from stronger global action, but it must also be prepared to do its part to meet the global goal. In this Review, the Authority outlines its views on what a reasonable contribution from Australia would be.

8 Summary This Review is timely as Australia considers its emissions reduction goals and develops its climate policies. A review of Australia s emissions reduction goals is especially relevant at this time. Australia has a formal international undertaking to reduce emissions by at least 5 per cent by 2020, compared with 2000 levels, and has indicated it might do more under certain circumstances. As part of international negotiations, Australia has committed to reviewing its minimum 5 per cent offer and to advising, by 30 April 2014, whether it proposes to increase its 2020 target. (This is not the last opportunity governments can strengthen their targets at any time.) A new international agreement, covering emissions reduction goals beyond 2020, is scheduled to be negotiated by the end of 2015. This agreement is intended to cover all major emitting economies; Australia will be expected to indicate its post-2020 targets by the first quarter of 2015. The government is currently revising Australia s climate policies. The Authority s Review examines the latest evidence on climate science and the impacts of climate change, international action to reduce emissions, and economic and social implications for Australia. It also reports on where Australia has successfully reduced emissions, where there are gaps and opportunities for greater reductions, and how a suite of policies might help to realise those opportunities in a cost-effective way. Where are we now? Australia s emissions intensity has halved since 1990 but more needs to be done. Australian governments Commonwealth, state and local have implemented a range of policies to reduce greenhouse gas emissions over the past two decades. Australia s emissions were broadly the same in 2012 as in 1990, notwithstanding a doubling in the size of the economy. This means that the emissions intensity of the economy has halved over that period. While broader economic forces have accounted for some of this reduction in emissions intensity, policy has also contributed. Further, Australia s emissions over the period 2008 2012 averaged 104 per cent of 1990 levels, less than its 108 per cent target under the Kyoto Protocol. As a result, Australia has 116 Mt CO 2 -e of emissions rights to carryover to its 2013 2020 Kyoto commitment. Further efforts are, however, necessary to achieve absolute reductions in emissions. In 2012, Australia s greenhouse gas emissions totalled 600 Mt CO 2 -e, 2.5 per cent above 2000 levels. In the absence of a carbon price or other effective policies, emissions are projected to grow to 685 Mt CO 2 -e in 2020, 17 per cent above 2000 levels.

targets and progress review final REPORT february 2014 9 What does the Authority recommend? The Authority recommends a coordinated set of goals that would manageably spread future efforts over time... comprising 2020 goals, a trajectory range to 2030 and a budget to 2050. In this report, the Authority adopts a budget approach to develop emissions reduction goals for the short, medium and long term (Chapter 7). Setting a budget for emissions through to 2050 highlights the trade-offs involved between actions taken now and those made necessary later. In short, weaker action now imposes a greater emissions reduction task on future generations. Setting longer term emissions reduction goals, in addition to shorter term goals, is especially significant for investors (and their financiers) in long-lived assets. The Authority recommends a coordinated set of goals for Australia: 2020 goals, providing a clear course for short-term action: a minimum 2020 target of 15 per cent below 2000 levels using Australia s carryover under the Kyoto Protocol to raise the 2020 target by 4 percentage points, giving an effective target of 19 per cent an indicative national trajectory consistent with 19 per cent and an emissions budget of 4,193 Mt CO 2 -e for the period 2013 2020. Beyond 2020, guidance for longer term planning and investment, subject to frequent review in light of new information: a trajectory range for emissions reductions of between 40 and 60 per cent below 2000 levels by 2030 a national emissions budget for 2013 2050 of 10,100 Mt CO 2 e, based on what might be considered Australia s fair share of a global emissions budget. While different goals were canvassed and assessed, the Authority believes its recommendations provide a credible set of goals for Australia at this time. Figure 1: Recommended emissions reduction goals 700 600 Emissions (Mt CO 2 -e) 500 400 300-19% by 2020-40 to -60% by 2030 200 National National emissions emissions 100 budget budget 2013 2020: 2013 2050: Historical emissions 4,193 Mt CO 2 -e 10,100 Mt CO 2 -e 0 1990 2000 2010 2020 2030 2040 2050 Source: Climate Change Authority

10 Summary Australia needs strong and lasting policies to reduce domestic emissions. International emissions reductions should complement domestic efforts. Targeted and sustained emissions reduction policies, including marketbased and complementary measures, are needed now to drive a steady transformation of the Australian economy. These can help Australia stay competitive as the world moves to a low-emissions future. Climate change policies should have regard to their distributional consequences and, as appropriate, be coordinated with industry, trade and other objectives. International emissions reductions can provide an environmentally sound and cost effective complement to domestic actions. The Authority recommends that Australia draw upon international emissions reductions to help meet the proposed 2020 target, and that the government establish a fund to purchase those reductions. The reasoning underlying the Authority s recommended goals The Authority recommends a minimum 2020 target of 15 per cent, rising to 19 per cent with carryover. A 5 per cent target is inconsistent with the below 2 degree goal. The pace of international action justifies Australia going further... with China and the United States stepping up their efforts. Based on all the evidence available to it, the Authority concludes that Australia s 5 per cent target is inadequate (Chapter 9) and recommends a minimum target of 15 per cent, rising to 19 per cent with the carryover from the Kyoto Protocol. There are three key reasons why the Authority makes these recommendations. First, a 5 per cent target for 2020 would not be a credible start by Australia towards achieving the below 2 degree goal. It would leave an improbably large task for future Australians to make a fair contribution to global efforts. A target of 15 per cent (plus carryover) represents a more appropriate response to the latest science and a more manageable spread of efforts over the decades ahead. While emissions reduction efforts would still have to accelerate in the future, significantly more of the projected budget to 2050 would be available for future years compared with a 5 per cent target. Second, the scale and pace of global action suggests Australia should be moving beyond 5 per cent (Chapter 4). The world s two largest emitters, China and the United States, are stepping up their efforts on climate change. Both countries have emissions reduction targets and are investing heavily in renewable energy estimated at more than US$100 billion in 2012. China is tightening its vehicle emissions standards, replacing inefficient coalfired power plants with more efficient plants, and has established five sub-national pilot emissions trading schemes. In the United States, a 2013 presidential action plan on climate change includes new restrictions on emissions from coal-fired power plants, stronger vehicle emission standards and additional energy efficiency measures. These are intended to complement existing state-based market initiatives to reduce emissions and increase the use of renewable energy.

targets and progress review final REPORT february 2014 11 A 2020 target of 15 per cent plus carryover is more in line with other countries. Australia s 5 per cent target is weaker than that of many comparable countries. For example, the United States has a 2020 target of 17 per cent below 2005 levels; the UK has a target of 34 per cent below 1990 levels; Norway has a target of 30 40 per cent below 1990 levels. A target of 15 per cent plus carryover for Australia would be more in line with the targets being pursued by such countries. Stronger targets can be achieved at a manageable cost. The government s conditions for moving beyond 5 per cent have been met. Third, the Authority believes the costs of meeting the recommended target would be manageable. The costs of delivering the recommended target depend very much on the policies used to pursue it. At this time, the government is still in the process of developing its policies and the Authority could not therefore assess the costs of pursuing the recommended target with such policies. In these circumstances, the Authority has drawn on economic modelling based on the current legislation to estimate the incremental costs of moving from 5 per cent to a stronger target (Chapter 10). This modelling suggests that adopting a 2020 target of 15 per cent plus carryover would slow annual growth in average per person income by 0.02 per cent, compared with meeting the 5 per cent target. One reason why the incremental costs are so low is that the current legislation allows a mix of domestic and international reductions to achieve the target. Australia could meet the whole of the incremental emissions reduction task associated with moving from 5 per cent to the recommended target through the carryover and the use of additional international emissions reductions. The government intends to implement different policies to achieve the 5 per cent target; these will have different costs from the approach envisaged in the current legislation. The issue of costs (and their distribution) will need to be revisited when the government finalises its policies. The incremental costs of moving to a stronger target would, however, be comparable to those estimated under the current legislation so long as the stronger target was achieved through the use of international emissions reductions. In 2009, the government set conditions for when Australia might move beyond the unconditional 5 per cent target to a 15 or 25 per cent target. In the Authority s view, the conditions for moving beyond 5 per cent have been met. Whether the conditions for 15 per cent have been met is unclear some elements have been met; others are marginal. The conditions for a 25 per cent target have not been met. The Authority s charter requires it to examine considerations beyond those accounted for in the conditions, including climate science, international actions, economic impacts and equity. Taken together, these broader considerations are believed to justify the Authority s recommended goals, including a minimum 2020 target of 15 per cent.

12 Summary The Authority recommends a medium-term trajectory range of 40 60 per cent reductions by 2030 The Authority recommends a trajectory range for emissions reductions from the 2020 target to a level between 40 and 60 per cent below 2000 levels in 2030. This range should be reviewed periodically as new information emerges. The middle of the trajectory range is consistent (on a straight-line basis) with the recommended national emissions budget to 2050. Over time, developments in climate science, international action and economic factors can be expected to affect Australia s appropriate medium- and long-term goals. A trajectory range would give Australia the flexibility to adjust its emissions reduction trajectory in response to changing circumstances. Climate change science suggests that to have a reasonable chance of achieving the below 2 degree goal, global greenhouse gas emissions need to be reduced substantially (Chapter 3). Keeping within a global emissions budget of 1,700 Gt CO 2 -e between 2000 and 2050 is calculated to give at least a likely (two-thirds) chance of staying below 2 degrees emitting less would improve the odds; emitting more would reduce them. A significant proportion of this global budget has been used already. and a long-term emissions budget of 10.1 Gt CO 2 -e to 2050. The Authority believes an emissions budget of 10.1 Gt CO 2 -e for the period 2013 to 2050 (or about one per cent of the remaining estimated global budget) would represent an equitable share for Australia (Chapter 8). Again, this budget should be kept under review and adjusted for relevant developments. What are the next practical steps for Australia? Action can help Australia stay competitive as the world acts to reduce the risks of climate change. A strong and coordinated suite of policies is essential for Australia to achieve the recommended goals. A continuing global trend towards stronger climate action and a lower emissions global economy could make it difficult for Australia to remain competitive as a high-emissions economy. To head off this risk, Australia needs policies now to drive reductions in domestic emissions, promote a steady transformation of the domestic economy, capture low-emissions growth opportunities, encourage innovation and stimulate new low-emissions investment. Many of these initiatives have long lead times. In the meantime, international emissions reductions can be used to complement domestic efforts and assist Australia to make its contribution to global action in a cost-effective way.

targets and progress review final REPORT february 2014 13 Australia can achieve substantial domestic emissions reductions if policies are put in place now. International emissions reductions are a cost-effective and environmentally sound way to help meet Australia s goals Substantial emissions reductions are available domestically (Chapter 11). The Authority has identified low- to medium-cost emissions reduction opportunities across all sectors of the economy, such as: using less emissions-intensive energy sources such as renewables, particularly for electricity generation reducing fugitive emissions from energy resource extraction, particularly the development of relatively lower emissions mines and uptake of existing and new technologies to capture methane modifying industrial processes; for example, using nitrous oxide abatement technology improving the efficiency of buildings, equipment and vehicles increasing reforestation and afforestation, lowering rates of deforestation and improving land management. The electricity sector could offer the single largest opportunity for emissions reductions in response to price incentives, through both a reduction in the emissions intensity of generation and energy efficiency. There can be lags between designing and implementing a policy to reduce emissions and seeing tangible results many of the potential actions and investments have extended lead times, and long-lived capital stock turns over slowly. If sustained and cost-effective policies are put in place in the next few years, emissions can be reduced substantially over the period to 2030. Energy efficiency will be particularly important in the near term. Policies that drive the transition to low-emissions technologies, buildings and vehicles will contribute more to emissions reductions beyond 2020 as equipment and infrastructure is replaced. To be in line with other developed countries and China, Australia should consider light vehicle CO 2 emissions standards. They are likely to be an effective complement to a carbon price or baseline and credit scheme, and could deliver significant, cost-effective emissions reductions and other benefits. Although it is important to drive domestic reductions, climate change is a global phenomenon. As long as international reductions are real, they have the same effect on climate outcomes as domestic reductions. Over-reliance on international emissions reductions could delay Australia s domestic transition, increasing the risk of disruptive and costly adjustment in future decades. Particularly in the period to 2020, however, using international reductions to complement domestic efforts could help Australia meet its emissions reduction goals at lower cost and support broader trade and foreign policy objectives. In turn, these benefits could encourage more ambitious action, both in Australia and overseas.

14 Summary complementing domestic action. The government should establish a fund to purchase genuine international emissions reductions to move from 5 per cent to the recommended 2020 goals. The Authority recommends Australia use international emissions reductions to bridge gaps between domestic reductions and the recommended goals. The government has indicated it will achieve the minimum 5 per cent target through domestic emissions reductions, but the Authority believes international reductions could also have a role to play in meeting that target. There is currently a large supply of genuine emissions reductions available in the global market at historically low prices. Moving from 5 per cent to the Authority s recommended target of 15 per cent plus carryover would require an additional 427 Mt CO 2 -e of emissions reductions over the period to 2020. The cost of purchasing all these reductions internationally is between $200 million and $900 million, assuming average unit prices of between $0.50 and $2 per tonne (current prices are less than $1). The Authority recommends a government fund be established to purchase sufficient genuine international emissions reductions to close any gap between domestic reductions and the recommended 2020 target. This would provide time to implement policies for efficient domestic emissions reductions, while enabling Australia to make a reasonable contribution to global efforts in a cost-effective way.

targets and progress review final REPORT february 2014 15 Recommendations Recommendation number page Emissions reduction goals short-term targets and longer term guidance A minimum 2020 emissions reduction target of 15 per cent below 2000 levels. Australia s carryover from the first commitment period of the Kyoto Protocol be used to raise the 2020 emissions reduction target by 4 percentage points, giving a 2020 target of 19 per cent. An indicative national trajectory for the period 2013 2020 that follows a straight line to the 2020 target. This line starts at Australia s first commitment period target under the Kyoto Protocol (108 per cent of 1990 levels) in 2010, and ends at 19 per cent below 2000 levels in 2020. R.5 124 R.6 124 R.7 124 A national carbon budget for the period 2013 2020 of 4,193 Mt CO 2 -e. R.8 124 Beyond 2020, Australia continue to reduce emissions within a trajectory range bounded by the paths to 40 and 60 per cent below 2000 levels in 2030. R.9 126 A national carbon budget for the period 2013 2050 of 10.1 Gt CO 2 -e. R.4 117 Periodic review of goals The trajectory range and the national budget to 2050 be reviewed at least every five years. There could be additional reviews to take account of major developments; for example, in 2016 to take account of international developments on the post-2020 framework. As part of these reviews, the trajectory range would be extended to maintain a similar period of guidance over time, and short-term targets and trajectories would be set within the existing range. R.1 106 The periodic reviews of the trajectory range and the national budget to 2050 have particular regard to the following general criteria changes in or new information about climate science, the level and pace of international action, and economic factors. R.2 106

16 Recommendations Recommendation number page Actions to achieve goals The government use international emissions reductions to bridge any gap between domestic reductions achieved under the Direct Action Plan and the recommended 2020 goals. The government establish a fund to purchase Clean Development Mechanism units to complement the Direct Action Plan and help meet the recommended 2020 goals. The government investigate the near-term introduction of fleet-average CO 2 emissions standards for light vehicles in Australia as a way to secure significant, cost-effective emissions reductions and related co-benefits. Implementation matters The government recognise voluntary action by cancelling one Kyoto Protocol unit for each tonne of emissions reductions achieved in the period 2013 2020 through: the voluntary cancellation of domestic units, the voluntary cancellation of renewable energy certificates, and GreenPower purchases. Carbon pollution caps for each of the first five years of the flexible-price period under the carbon pricing mechanism of: Year 2015 16 2016 17 2017 18 2018 19 2019 20 Cap (Mt CO 2 -e) 234 228 222 215 209 R.11 186 R.12 186 R.10 166 R.3 109 R.13 199

targets and progress review final REPORT february 2014 17 Introduction and context A

18 Part a Part A introduces the Targets and Progress Review. In this Review, the Authority makes recommendations to the parliament, through the Minister for the Environment, about emissions reduction goals for Australia. The Authority also reviews Australia s progress towards meeting these goals, and identifies future emissions reduction opportunities both within Australia and internationally. In developing its recommendations, and in drawing the conclusions set out in this report, the Authority considered evidence and expert and stakeholder views about a wide range of matters. Part A examines the context for making decisions about Australia s emissions reductions goals. It presents evidence about climate science, the impacts of climate change and what is required to meet the global goal to limit temperature rises to below 2 degrees. It then considers global action to reduce greenhouse gas emissions, how global action measures against the global goal and what this means for Australian action. Part A sets out: the scope of the Targets and Progress Review and the Authority s approach (Chapter 1) climate science and the likely impacts of climate change on Australia and other countries (Chapter 2) the amount of greenhouse gas emissions the world can emit while preserving a likely chance of limiting global warming to below 2 degrees (Chapter 3) global action to reduce greenhouse gas emissions and its implications for Australia s emissions reduction goals (Chapter 4).

targets and progress review final REPORT february 2014 19 about this review 1 Climate change poses serious risks to the Australian community, economy and environment. Effective policies that reduce Australia s emissions and support a global solution are in Australia s interest. The Climate Change Authority is an independent body established to provide expert advice to the Commonwealth Government on Australian climate change policy. This report fulfils the Authority s legislative requirements to make recommendations about Australia s emissions reduction goals and report on progress in reducing its emissions. The report recommends short-, medium- and long-term emissions reduction goals, as well as the corresponding trajectory ranges and emissions budgets. This will help inform government decision-making on future international commitments and the design of new policy. In the Targets and Progress Review, the Authority has considered the latest climate science, international action, Australia s progress in reducing emissions, international and inter-generational equity, the economic costs of different targets and opportunities for future emissions reductions. Australia s existing international obligations and undertakings were a starting point for the Review. This chapter introduces the Targets and Progress Review. It provides information about the Authority, discusses the Review, and explains the Authority s approach to its analysis and recommendations. 1.1 The Climate Change Authority The Climate Change Authority is an independent statutory agency, established to provide expert advice on Australian climate change policy, including through a scheduled series of reviews of climate programs and legislation. The Authority is chaired by Mr Bernie Fraser and comprises nine members with expertise in climate science, economics, business and public policy. Its work is guided by a set of principles under the Climate Change Authority Act 2011 (Cth). The Act states that, in conducting a review, the Authority must have regard to the following matters: economic efficiency environmental effectiveness equity

20 Part a chapter 1 the public interest the impact on households, business, workers and communities the development of an effective global response to climate change Australia s foreign policy and trade objectives any additional principles the Authority considers relevant. The Authority has taken these matters into account in the Targets and Progress Review. The Authority is required to consult in conducting its reviews. Public consultation has been a key part of the Targets and Progress Review. The Authority has engaged with a wide range of interested parties, who have provided essential input to the review process. 1.2 Context Climate change is an ongoing global problem that poses serious risks to the Australian community, economy and environment. Effective policies that reduce Australia s emissions and support a global solution are in Australia s interest. This report can help inform the Commonwealth Government as it makes decisions in the near future about Australia s 2020 target and post-2020 emissions reduction goals (outlined in Figure 1.1). Under the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol, countries are considering ways to increase global action to reduce emissions. Australia has committed to reviewing its 2020 Kyoto target and advising whether it intends to strengthen it from the minimum 5 per cent reduction (on 2000 levels) by April 2014. At the same time, UNFCCC Parties are considering a post-2020 international climate framework and Australia will be expected to indicate its post-2020 goals by the first quarter of 2015. The government is also free to strengthen its emissions reduction efforts at any time. Figure 1.1: The Authority s Review and international climate change milestones 2014 15 2014 February Authority s Targets and Progress Review released April Australia to review its 2020 target and advise the UNFCCC if it will increase its target September World leaders summit to discuss global action on climate change hosted by UN Secretary General 2015 First quarter Australia expected to put forward its post-2020 goals December UNFCCC meeting to negotiate a new post-2020 agreement This report can also inform government decision-making as it determines new policy settings to address climate change. The government has announced it intends to repeal the carbon pricing mechanism and replace it with a Direct Action Plan. In December 2013, the government released a Green Paper setting out its preferred options for the design of an Emissions Reduction Fund, which is the centrepiece of the Direct Action Plan. A White Paper outlining the fund s final design is due in early 2014. 1.3 The Targets and Progress Review The Targets and Progress Review covers two legislated reviews under the Clean Energy Act 2011 (Cth), which require the Authority to: make recommendations about Australia s emissions reduction goals, including specifically an indicative national emissions trajectory and a national carbon budget (referred to in this report as an emissions budget) and carbon pollution caps (s. 289)

targets and progress review final REPORT february 2014 21 report on Australia s progress in achieving its medium- and long-term emissions reduction targets, and progress in meeting a national emissions budget (s. 291). The matters to which the Authority must have regard in conducting these reviews are set out in the Clean Energy Act and listed at Box 1.1. Box 1.1: Legislated review requirements The Clean Energy Act sets out specific matters to which the Authority must have regard in the Targets and Progress Review: Review of caps, trajectories and budgets (s. 289) (a) Australia s international obligations under international climate change agreements; (b) undertakings relating to the reduction of greenhouse gas emissions that Australia has given under international climate change agreements; (c) Australia s medium-term and long-term targets for reducing net greenhouse gas emissions; (d) progress towards the reduction of greenhouse gas emissions; (e) global action to reduce greenhouse gas emissions; (f) estimates of the global greenhouse gas emissions budget; (g) the economic and social implications associated with various levels of carbon pollution caps; (h) voluntary action to reduce Australia s greenhouse gas emissions; (i) estimates of greenhouse gas emissions that are not covered by this Act; (j) estimates of the number of Australian carbon credit units that are likely to be issued; (k) the extent (if any) of non-compliance with this Act and the associated provisions; (l) the extent (if any) to which liable entities have failed to surrender sufficient units to avoid liability for unit shortfall charge; (m) any acquisitions, or proposed acquisitions, by the Commonwealth of eligible international emissions units; (n) such other matters (if any) as the Climate Change Authority considers relevant.

22 Part a chapter 1 Review of progress (s. 291) (a) the level of greenhouse gas emissions in Australia; (b) the level of purchases of eligible international emissions units (whether by the Commonwealth or other persons); (c) the level of greenhouse gas emissions that: (i) are attributable to activities in the Australian economy; and (ii) are not reflected in the provisional emissions numbers of liable entities; (d) voluntary action to reduce greenhouse gas emissions; (e) such other matters (if any) as the Climate Change Authority considers relevant. In line with the legislative requirements, this report: presents evidence about climate science and international action to reduce greenhouse gas emissions assesses Australia s progress in reducing greenhouse gas emissions across the whole economy and within specific sectors recommends a coordinated set of emissions reduction goals for Australia: a short-term target for 2020, and an emissions budget and trajectory to 2020 providing a clear course for short-term action a trajectory range to 2030 and a national emissions budget to 2050, providing guidance for longer term planning, subject to periodic review to respond to new information and changing circumstances identifies and assesses opportunities for emissions reductions in different sectors of the economy, and policies to capture these opportunities recommends international emissions reductions be used to help Australia meet its emissions reduction goals (in particular, its 2020 target).

targets and progress review final REPORT february 2014 23 Box 1.2 defines the key terms, including target, budget, trajectory and net target. Box 1.2: Key definitions Australia s emissions reduction goals Target: A national emissions goal for a specific year. The Authority will recommend a 2020 target expressed as a percentage reduction in emissions from 2000 (see Figure 1.2). Budget: Australia s cumulative emissions allowance over a period of time. The Authority will recommend a short-term budget for total emissions between 2013 and 2020, and a long-term budget between 2013 and 2050. Trajectory: Australia s indicative year-by-year national emissions pathway to its target. The Authority will recommend a 2013 to 2020 trajectory. It will also recommend a trajectory range from 2020 to 2030 (see trajectory range below). The year-by-year points on the trajectory are indicative (non-binding) targets in each year. The area under the trajectory constitutes an emissions budget. Trajectory range: The range within which future trajectories may be set. A trajectory range provides an indication of future trajectories and flexibility to take into account new information. The Authority is recommending a trajectory range from 2020 to 2030. Figure 1.2: Target, trajectory, trajectory range and budget Trajectory Target Emissions Budget Trajectory range Time Source: Climate Change Authority Net targets: The recommended emissions reduction goals are net of trade. This means that any international emissions reductions Australia buys will count as reductions towards its target but any emissions reductions sold overseas cannot be counted. Emissions in Australia could be higher than the target if offset by purchases of international emissions reductions.

24 Part a chapter 1 1.3.1 The Authority s approach to recommending emissions reduction goals and assessing Australia s progress The Authority has weighed a broad range of considerations in reaching its recommendations, including climate science, global action, the costs of reducing emissions and Australia s appropriate contribution to global emissions reductions. Figure 1.3 illustrates the key considerations of the Targets and Progress Review, as set out in this report. Figure 1.3 Targets and Progress Review key considerations and structure of the report Part A Part B What the science tells us International action to reduce emissions Australia's progress to date in reducing emissions Objective Limit global warming to below 2 degrees Part C Part D Recommendation Australia s emissions reduction goals (Part C) and caps (Part E) Australia's equitable share of emissions Economic implications for Australia Domestic and international opportunities for emissions reduction Source: Climate Change Authority The Authority has taken Australia s existing international obligations and undertakings as a starting point for its deliberations, including Australia s commitment to the global goal to limit warming to below 2 degrees. It has also taken into account Australia s other emissions reduction commitments, including its international undertakings under the: UNFCCC to reduce emissions by 5 per cent (unconditional) to 25 per cent below 2000 levels by 2020 Kyoto Protocol to limit average annual emissions in the period 2013 to 2020 to 99.5 per cent of 1990 levels, a calculation based on the unconditional 5 per cent target. None of the Authority s recommendations would lead to Australia breaching its existing international obligations and undertakings. In other words, Australia s existing UNFCCC and Kyoto Protocol commitments have been taken as minimums. 1.3.2 Public consultation The Authority conducted extensive consultation as part of the Review. Feedback from stakeholders was invaluable in informing this report and its recommendations. The public consultation included targeted roundtable discussions as well as workshops with experts on a global emissions budget, modelling assumptions and the electricity sector. Details of stakeholder consultation are at Appendix A. The Authority released an Issues Paper in April 2013 and a Draft Report in October 2013. It received 69 Issues Paper submissions and 138 Draft Report submissions, plus over 12,000 submissions through a GetUp campaign. Submissions are available on the Authority s website at www.climatechangeauthority.gov.au.

targets and progress review final REPORT february 2014 25 1.4 Structure of this report This report is divided into five parts. Part A: Introduction and context The Authority has considered Australia s emissions reduction goals in a global context. Part A outlines: what climate science tells us about the risks climate change poses for Australians (Chapter 2) how climate science can inform the calculation of global emissions budgets and limits on global emissions consistent with a given limit on global warming (Chapter 3) global action underway to reduce emissions and Australia s role in that global action (Chapter 4). Part B: Australia s policies and progress to date Australia s progress to date in reducing emissions is relevant to considering future action. Part B outlines: Australia s policies to address climate change (Chapter 5) Australia s progress in reducing greenhouse gas emissions between 1990 and 2012 (Chapter 6). Part C: Australia s emissions reduction goals This sets out recommendations on: the timeframe, form and scope of Australia s emissions reduction goals (Chapter 7) a long-term budget for Australia, including consideration of equity between countries and generations (Chapter 8) Australia s emissions reduction goals (Chapter 9). Part C also considers the economic implications of the recommended emissions reduction goals (Chapter 10). Part D: Reducing Australia s emissions opportunities and challenges This part examines: emissions reduction opportunities across different sectors of the Australian economy and challenges to realising those opportunities (Chapter 11) the benefits and risks of using international emissions reductions to help meet Australia s goals (Chapter 12). Part E: Implementation issues under the carbon pricing mechanism The Authority s recommendations to achieve Australia s emissions reduction goals under the carbon pricing mechanism, including: recommendations for annual carbon pollution caps (Chapter 13).

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targets and progress review final REPORT february 2014 27 Science and impacts of climate change 2 Human activities produce greenhouse gases that are causing the climate to warm. If emissions continue to grow at current rates, warming is projected to increase rapidly over the 21st century, exceeding 2 degrees within the next few decades and foreseeably reaching 4 degrees or more by the end of the century. Higher temperatures are projected to bring increasingly severe impacts on a global scale, which could include inundation of low-lying coastal areas, climate-induced migration of millions of people, growing risks to human health from many sources and the collapse of vulnerable ecosystems. In Australia, impacts are projected to include changes in rainfall; more frequent extreme events such as drought, flood and heatwaves; damage to sensitive ecosystems and infrastructure; and health effects. The extent of impacts will be determined by a number of factors, including future emissions of greenhouse gases and the climate system s response. The international community has committed to limiting global warming to below 2 degrees, which requires strong action to reduce the world s emissions. No level of warming is considered safe, but 2 degrees would avoid the worst of the projected impacts and could allow Australia to adapt to many of the expected changes. As temperatures increase, adaptation will become increasingly costly and challenging. Global action to limit warming to below 2 degrees provides clear benefits to Australia. The Targets and Progress Review is founded on science. There is extensive evidence that human activity is causing the world to warm at unusually rapid rates. Despite this evidence, coverage of climate science can be misleading and confusing. This chapter provides a clear summary of the science and the potential impacts of climate change for Australia. It discusses: climate science and the relationship between greenhouse gases and global warming the impacts caused by climate change to date the projected impacts of climate change, both globally and in Australia the social and economic costs of climate change.

28 Part a chapter 2 2.1 Climate science Human activity is causing the climate to warm. Activities such as burning fossil fuels, undertaking industrial processes and clearing land produce greenhouse gases. These gases trap heat radiated from Earth within the atmosphere, like a greenhouse. As concentrations of greenhouse gases increase, more heat is retained and the climate gets warmer. Since the beginning of the Industrial Revolution in 1750, the concentration of carbon dioxide in the atmosphere has grown by 40 per cent, methane by 150 per cent and nitrous oxide by 20 per cent (IPCC 2013a, p. 7). According to ice core records, which show the atmosphere s historical composition, the current concentrations of these three gases substantially exceed the concentrations at any other time over the past 800,000 years (IPCC 2013a, p. 7). Figure 2.1 charts their concentrations over the past 1,000 years, showing rapid increases in all three major greenhouse gases, particularly since the 1950s. Figure 2.1: Carbon dioxide, methane and nitrous oxide concentrations over the past 1,000 years 1,800 400 Atmospheric methane (ppb) 1,400 1,000 600 360 320 280 Atmospheric carbon dioxide (ppm), nitrous oxide (ppb) 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 Year Source: Adapted from CSIRO and BoM 2012, p. 8 CHAPTER 2 FIGURE 2.2 (NEW FIGURE) WILL BE A TABLE CHAPTER 2 FIGURE 2.3 (NEW FIGURE)

targets and progress review final REPORT february 2014 29 Climate change is a long-term issue, as greenhouse gases can remain in the atmosphere over very long time scales. Carbon dioxide is the most important long-lived greenhouse gas and it is produced in large quantities by human activities. About one-third of the carbon dioxide increase due to emissions this year will remain in the atmosphere in 100 years and about 20 per cent will still be present in 1,000 years. So, long-lived greenhouse gases released now lock in future warming, even if no more are emitted. For example, maintaining greenhouse gas concentrations (and other atmospheric constituents) at 2000 levels would have increased warming by an additional 0.6 degrees by the end of the 21st century. This is in addition to the 0.8 degrees of warming observed to 2000 (IPCC 2007a, SPM, 10.7.1). The long-term effects of greenhouse gases mean that the worst climate change impacts will be imposed on future generations, regardless of whether they contribute additional emissions themselves. While it is unequivocal that the climate is warming, the climate system is complex and there are scientific uncertainties about how much the climate will change in the future. There is uncertainty about future emissions and levels of greenhouse gas concentrations, which will be determined by policies, population and technology changes. There is also uncertainty in the precise temperature response to future greenhouse gas concentrations. Climate models project future temperature changes that could be experienced under different greenhouse gas concentration scenarios, but can only estimate temperature increases within a probability range. The probability of limiting warming to 2 degrees under different levels of greenhouse gas emissions is discussed in detail in Chapter 3. There is also some uncertainty about how land and ocean carbon sinks will operate in a warmer climate. To date, about 55 per cent of carbon dioxide emissions from fossil fuel combustion has been absorbed by the land and ocean combined, with the rest remaining in the atmosphere. However, the ocean has become less effective at absorbing carbon dioxide over the past 50 years, and the ability of trees to increase their uptake of carbon dioxide is projected to peak and decline by the middle of this century (Canadell et al. 2007; IPCC 2007b, p. 213). These changes would result in more carbon dioxide remaining in the atmosphere where the greenhouse effect takes place, so warming could be amplified in future. While these uncertainties are real, the scientific understanding of climate change impacts has increased substantially since 1990, when the first comprehensive assessment of the state of climate change science was published by the Intergovernmental Panel on Climate Change (IPCC) (see Box 2.1 for an explanation of the IPCC s reports). Since then, there have been large increases in the number of climate observations and studies, substantial development in the scientific understanding of the climate system and increased sophistication of climate models. These advances have resulted in greater confidence in the connection between human activities and climate change, as well as in predicting future climate impacts (Figure 2.2).